Despite criticism, the wealth manager claims to negotiate better deals than its rivals
Much like the acquisition strategy and adviser charging model of St James’s Place, advisers can feel in the dark about how the wealth manager selects its funds and fund managers.
Despite negative press over its opaque charging structure, SJP has continued to attract new money in recent years and powered up its investment committee with new independent advisers.
In an exclusive interview with Money Marketing, SJP chief investment officer Chris Ralph reveals how the largest UK wealth manager selects fund managers, how it decides when to replace them, and how it deals with their mistakes.
SJP outsources the management of its portfolios and unit trusts to external fund management firms. Currently, the company has 38 funds across fixed income, equities and alternatives, and arranges those funds into nine portfolios, six of which aim for a growth outcome, while three are income generating, ranging from defensive to adventurous risk.
Ralph says it is extremely unlikely SJP will ever employ internal managers or invest in single funds or asset classes because that would create conflicts of interest. He says outsourcing fund management is in the best interest of clients.
Ralph says: “If you talk to any of our advisers, and those that have come into our business in the past five years, they’ll say they spent a lot of their time when they were IFAs selecting managers and building portfolios. None of them have to worry about that here. All they have to worry about is to go and see clients and give them a brilliant service.”
He says having a clear investment philosophy and process, and having passion, integrity and risk awareness are the most sought-after qualities SJP looks for in a fund manager.
It also looks at whether it can secure a fee discount with the selected manager.
The way SJP picks fund managers aligns with the way the company decides to replace them, looking for where fund managers might have lost passion for what they do or where they have changed the investment process to something that does not align with SJP’s way of working.
In January, SJP replaced global fund house Axa Investment Management as the manager of its £3bn Balanced Managed Unit Trust after 11 years in charge. SJP picked US-based investment manager GMO and Jennison Associates as co-managers of the fund, starting their mandate next summer.
Ralph says: “Usually, managers’ changes tend to be forced upon us. That is not to say that we don’t make mistakes. It would be incredibly arrogant for us to say that we are perfect. We do make mistakes and we do have to correct those mistakes, but more often than not, changes are forced upon us.”
SJP faces regular criticism about its adviser charges but Ralph is adamant that when it comes to fund fees, SJP negotiates better deals with fund managers than its rivals.
He claims the average fee for SJP funds over similar strategies run by the same managers is half of what other platforms offer.
He says: “We have a track record for realising low fees for our clients. I am very familiar with the rest of the charging structure that we have in SJP and I am absolutely convinced that providing a good long-term service to our clients is something our clients are prepared for. The evidence shows that is the case.”
Page Russell director
It’s amazing how much faith you can have in managers to deliver alpha or skills when you’re being paid to do so. This is what SJP set their stalls on, saying they’ve got clever people to deliver good alpha.
[Ralph] is the pinnacle of that particular promise, and he has been paid to deliver that promise, so it is obvious he is going to say that. I just see the world through another filter.
In 2017, SJP saw record gross inflows of £14.6bn, a 29 per cent increase from the prior year. Net inflows were up 40 per cent to £9.5bn, which increased funds under management by 20 per cent over the year to close at an all-time high of £90.7bn.
The Lang Cat consulting director Mike Barrett says it is possible SJP manages to negotiate discounts mostly with large firms, but this is hidden within the ongoing charges figure for their segregated mandates.
Barrett says: “More importantly, it’s certainly not the case that their clients are benefiting from low-cost investing. From a client point of view the only figure that matters is the total cost of ownership, and for SJP that is – even by their own admission – a ‘premium offering’.”
Finding the balance
Recent Money Marketing and Square Mile analysis showed only two of 26 funds offered by SJP had outperformed their benchmarks over both one-year and five-year time frames, and since their inception. Ten of the 26 funds have under-performed when looking across one year and five years, and since inception, however.
Taking fees into account, which are displayed as a total cost, including advice and other expenses, investors end up paying around 2 per cent each year.
Ralph says net returns are the key figure to look out for, and that using passive funds instead of active to reduce costs would not be the right move for the company.
He says: “We will pay the right price, the price that we need to access the talent that we want. We are in an incredibly strong position because we are very long term, we have had positive cash flows every quarter over the past 10 years.”
Ralph says SJP is in talks with a well-known US hedge fund manager who wants to manage £1bn for it, and potentially agree to a flat fee, instead of a standard hedge fund fee.
He invests significant portion of his wealth in SJP personally, both in shares and in the investment products.
On the role of advisers in recommending funds, Ralph says they have “the obligation” to give clients the best advice, but the firm does not place pressure on them.
He says: “Really importantly, we don’t insist that clients have to go into one of our portfolios. There is no obligation for an adviser to choose an SJP example portfolio, but we do see a good degree of new money going into the portfolios we recommend.”
A former SJP adviser told Money Marketing that during their time at the wealth manager, the default fund solution was equal across the five managed funds, which they likened to “shoe horning”, as the FCA puts it.
Ralph says: “When the company was founded there were three managed funds, and then there were five. The portfolios we have now have been in existence since 2011, before that it wasn’t just a single portfolio.”
Capital Asset Management chief executive
SJP negotiates fees very well with fund managers but they add their own significant charges so they make little money on the actual funds and more on the margins. A boutique firm is more likely to say yes than a larger organisation [to negotiate discounts].
The bigger question is if you do analysis on returns, SJP funds are third or fourth quartile. The clients will be better off looking at index funds. SJP remains hugely successful for their ability to gather assets. They have good sales people to convince clients they have the best proposition.
Ralph, who previously ran Fidelity International’s multi-manager business, says SJP is more comfortable selecting fund managers from boutique firms, rather than big companies.
He says small asset management firms that are relatively unknown in the market, as opposed to giants such as BlackRock, have a “clearer” approach to investing, and are better aligned to SJP’s principles.
SJP employs BlackRock to run its UK absolute return fund, however. It is also the only fund in the range that charges a performance fee.
SJP’s investment committee has seen significant change since Ralph joined the firm, adding more independent advisers and external consultants.
The committee currently has seven members, including four external members, of which two are female investment professionals.
SJP also added independent consultants from Redington on top of existing advisers from Stamford Associates.
Despite being the chief investment officer, Ralph doesn’t chair the committee, but the role is filled by one of SJP’s managing directors, David Lamb, who has been on the firm’s board since 2007.
Ralph says: “What we agreed is that I can play a better role not having responsibilities of chairing an investment committee because I can better contribute to the debate around the table if I am not trying to chair the discussion as well.”
How does SJP rectify fund managers’ mistakes?
We try to understand the nature of the mistake, and the decision-making process behind it. When an airline pilot tells you they are right 60 per cent of the time, then you need to worry, but when a fund manager says he or she is right 60 per cent of the time, that is a really good result.
Fund managers are always going to make mistakes, but what we
need to understand is how a fund manager responds. Are they mistakes that fundamentally challenge the way the fund manager invests, or are the mistakes part of the investment process?
If you have a manager blaming analysts, markets, or SJP and not taking responsibility for themselves then that is a real worry for us.
A fund manager needs to be confident but if that translates into arrogance, where they think they are better, superior or they have a divine right to manage our clients’ money, that is much less likely to lead to a successful outcome.